Basics of Capital Markets in India [Part-I]

Types of Companies

Main types of companies in India

The companies registered under the Companies Act 1956 are of three types as follows:

  • Unlimited Company
  • Company Limited by Guarantee
  • Company Limited by Shares: These are of two types-
    • Private company
    • Public Company

Further, the Companies Act 2013 has also provisions to start a One Person Company (OPC) in India.

Unlimited Company

The unlimited company is a company where there is no limit on the liability of its members. This means that if the company suffers a loss and the company’s property is not enough to pay off its debts, the private property of its members is used to meet the claims of the creditors. This means that there is a huge risk in such companies. Unlimited companies are not found in India; instead, their space is occupied by the proprietary kind of businesses.

Limited Company

In a limited company is limited either by Guarantee or Shares. On this basis, there are two types of limited companies in India.

  • Company Limited by Guarantee: In such a company, the liability of the members is limited to the extent of guarantee given by them in the event of winding up of the company.
  • Company Limited by Shares: In this kind of the company, the liability of the members is strictly limited to the extent of nominal value of shares held by each of them. If a member has already paid the full amount of the shares, he shall not be liable to pay any amount. If a member has partly paid the shares, he can be forced to pay the remaining amount during the existence of the company as well as during the winding up. Such companies are of two kinds, private and public.

Private Limited Company

In India, a private company is the one which has a minimum paid up share capital of ` 100000 or such higher capital as prescribed by the Companies Act. Its Article of association mentions that the company

  • Restricts the right to transfer its shares
  • Limits the number of its members from 2 to 50
  • Cannot go for invitation from public to subscription to any of its shares
  • Cannot accept deposits from persons other than its members, directors and relatives.

What is a Public Limited Company?

A public company means a company which is not a private company and has minimum of 7 shareholders/subscribers. It has to have a minimum paid-up share capital of ` 5 Lakh.

What are the differences between a Public Limited Company and Private Limited Company?

Distinction Private Company Public Company
Minimum Paid-up Capital 1 Lakh 5 Lakh
Minimum Number of Members 2 7
Maximum Number of Members 50 No restriction
Transerferability of shares Complete Restriction No Restriction
Issue of Prospectus Prohibited Free
Number of Director At least 2 At least 3
Commencement of Business Immediately after incorporation Only after commencement of business certificate is obtained
Statutory meeting No Obligation Obligatory
Quorum 2 members 5 members
Managerial remuneration No restriction Can not exceed more than 11% of Net Profits

Share Markets

Understanding Shareholding

Every business needs some capital to start up. When a new business is started, the personal savings of an entrepreneur along with contributions from friends and relatives are the source of fund. The entrepreneur in this case can also be called a promoter. This may not be feasible in case of large projects as the required contribution from the entrepreneur (promoter) would be very large even after availing term loan; the promoter may not be able to bring his / her share (equity capital).Thus availability of capital can be a major constraint in setting up or expanding business on a large scale, because of this limited pool of savings of small circle of friends and relatives.

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